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Apr 5, 2014

Finance lease is not a lease transaction- HC

High Court denied to treat lease transaction as 'Finance Lease' due to some questionable terms in lease agreement

Facts:

(1)The lessor-assessee offered interest portion of the sum received under lease transaction as its income. In support, assessee stated that in view of 'Accounting Standard 19:

Leases' in case of Finance Lease only the interest portion shall be offered as income and the lessor can't claim depreciation on the leased asset.

(2) However, in the return of income, assessee claimed depreciation as well stating that the Circular dated February 9, 2001 provided depreciation to lessor even in case of finance lease.

(3) The Assessing Officer contended that offering only interest income to tax and claiming depreciation tantamount to double deduction. Therefore, the entire lease rental would be taxable as income of the lessor and consequently, it would be entitled to claim depreciation.

Held:

(a)The High Court scrutinized the terms of the agreement entered into between the parties which provided for certain terms, which could not be presented in a finance lease transaction, as under:

i. The lease agreement provided for delivery of the asset to the lessor on expiration of the lease term.

ii. Affixing the name of the lessor on the property.

iii. The equipment was delivered by the supplier to the location of the lessor-assessee.

(b) Therefore, the High Court held that the transaction was a simple lease agreement and not a finance agreement.